The world’s seemingly insatiable demand for fuel makes oil and gas investments an appealing addition to many portfolios. Whether you are seeking a replacement property for a 1031 exchange or simply looking for some diversification, this is an option that is well worth exploring.

The oil and gas sector brings many potential benefits. However, it is also complex and comes with risks that aren’t seen in other market sectors. Before adding oil and gas to your portfolio, it’s important to fully understand the various investment options, the in’s and outs of how they work, and the pros and cons. The following overview will provide the information you need, to begin exploring whether oil and gas investments are right for you. 

Common Ways to Invest in Oil and Gas

Investors looking for ways to get involved in the oil and gas sector have a wide variety of options. Some of the most common include:

• Large-cap stock investments
• American depository receipts (ADRs)
• Exchange-traded funds (ETFs)
• Futures and options 
• Contracts
• Royalty Interest Investments
• Mutual funds
• Partnerships
• Working interests
• Drilling programs

Some forms of oil and gas investments also qualify as replacement properties for a 1031 exchange. Each of these investment options has its own pros and cons. It’s also important to note that some are appropriate for novice investors while others geared more towards experienced investors with a high risk tolerance. 

Advantages of Oil and Gas Investments

There are many reasons to consider adding oil and gas investments to your portfolio. Here’s a look at some of the most important benefits. 

Diversification 

Diversifying your portfolio is one of the most important strategies for risk management. Since rising gas prices often depress other sectors of the economy, oil and gas holdings can provide a hedge against losses in other sectors. 

High Potential Returns

Many oil and gas investments have the potential to produce significant profits. This is particularly true when investing in small oil and gas companies, direct participation programs, or futures. The demand for oil and gas is also expected to continue rising. A combination of dwindling supply and growing demand bodes well for a high return on investment. 

Attractive Dividend Income

In addition to returns, oil and gas investors also stand to benefit from attractive dividends. This can provide passive income, further boosting your portfolio. 

Tax Benefits 

Since the U.S. government wants to encourage domestic energy production and reduce reliance on foreign fuels, it offers investors generous tax advantages. This includes deductions for lease costs, tangible and intangible drilling costs, passive and active income deductions, and more. 

Potential Drawbacks to Consider

All investments come with risk, and oil and gas investments are no exception. While many investors believe the benefits far outweigh the potential drawbacks, it’s important to fully understand what you’re getting into. Here’s a look at a few of the concerns oil and gas investors must consider. 

Price Volatility 

While oil and gas investments have the potential for high returns, these holdings are also quite volatile. Not only do operational expenses have a significant impact on investment values, but companies in this sector often face forces that are beyond their control. This can result in large and unexpected swings in profits and values. 

Unpredictability 

Oil and gas resources are constantly dwindling. To maintain a positive cash flow, companies must continually find new sources. However, this creates a significant amount of uncertainty. When companies invest in exploration, there’s no guarantee that they’ll find what they’re looking for – and if they don’t, it can lead to major losses. 

Environmental Issues 

The use of oil and gas creates carbon emissions, which can damage the environment. In recent years, there has been a push to focus on renewable energy. While demand for oil and gas has not yet significantly declined, as renewables become a way of life, oil and gas investments may lose value. 

Political Intervention 

Some oil and gas investments are located in politically unstable areas, adding even more potential for volatility and risk. The valuation of oil and gas investments may be impacted by trade policies, currency valuations, tax reforms, changes in government, and other types of political intervention. 

Safety Concerns 

Unfortunately, oil spills, fires, and accidents are not uncommon in the oil and gas industry. One major slip-up can have catastrophic consequences. BP’s Deepwater Horizon oil spill in the Gulf of Mexico is a primary example. While this occurred in 2010, the company is still paying for the damages today. 

Explore Oil and Gas Investment Options   

Oil and gas are some of the most important commodities in the modern world. As long as you understand and are comfortable with the risks, investing in them can be a smart move. If you’re interested in exploring whether these investments are a good choice for your portfolio, the team at Fortitude Investment Group is here to help. Contact us today or schedule a consultation here.

This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.

There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. 

Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.

Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Mutual Funds Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Trading futures involves the risk of loss and is not suitable for all investors. Please consider carefully whether futures are appropriate to your financial situation. Only risk capital should be used when trading futures. Investors could lose more than their initial investment. You must review customer account agreement prior to establishing an account.  Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled "Characteristics and Risks of Standardized Options," which outlines the purposes and risks of option transactions. This booklet is available from your Financial Advisor or at http://www.theocc.com/about/publications/character-risks.jsp.  Supporting documentation of claims will be supplied upon request.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC.  Investment advisory services offered through Concorde Asset Management, LLC, (CAM) a SEC registered investment advisor. Insurance offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM and CIA.